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Design Liability under NEC

April 2017 - Issue 92

The recent case of SSE v Hochtief contained important lessons for employers, contractors and their advisers alike on what effect NEC Option X15 (which limits the contractor’s design liability to reasonable skill and care) has in practice. Whilst this was a Scottish decision, it will be persuasive in the English courts.

Main Facts

Under the NEC3 Engineering and Construction Contract, the contractor’s core obligation is to provide the works in accordance with the Works Information. If the Works Information prescribes a particular purpose, this clause can import a fitness for purpose obligation into the contract. The English courts have also indicated that even if there is no express term, a fitness for purpose obligation might well be implied into a D&B contract.

As a result, many contractors seek to bring their design liability in line with the standard required of professionals, adopting wording along the lines of NEC Option X15.1: “the Contractor is not liable for Defects in the works due to his design so far as he proves that he used reasonable skill and care to ensure that his design complied with the Works Information.”

Ultimately, this clause leaves the employer bearing the risk for non-negligent shortcomings in the contractor’s design. Fundamentally, the problem is that one party has to bear the risk for non-negligent design risk and typically neither party wants to do so, especially on a complex high value civil engineering project.

In SSE v Hochtief it left the employer (SSE) with a £130 million bill for repairs. The case concluded that the contractor was not obliged to guarantee the performance of the works where Option M (X15) was adopted so that the contractor would not be liable for defects in the works due to his design so far as he proved that he used reasonable skill and care to ensure that it complied with the Works Information. The court held that to impose strict liability on the contractor would effectively rob Option M of its meaning and make redundant some of the other provisions regarding repair and maintenance.

The court held that Option M could not be interpreted as a guarantee of the works by the contractor. The ‘familiar and lesser’ obligation of reasonable skill and care was the test. If the employer was correct, this would impose an overarching obligation of fitness for purpose and therefore strict liability on the contractor and rob Option M of its meaning.

It remains the fact that non-negligent design defects are a very real risk, with very real consequences, and whoever that risk is allocated to should consider ways in which it can be mitigated. At the very least, it should be factored into the contract price.

Conclusion

One very practical issue arising was the possible adverse impact that the NEC standard wording had on the administration of the contract, and the approach Hochtief was forced to adopt in its defence at the trial. Because the contract reversed the burden of proof, SSE insisted on Hochtief bearing half of all the costs of reinstatement works as a precondition to carrying out the remedial works. This contributed to SSE’s decision to appoint an alternative contractor. Furthermore NEC’s reversal of the burden of proof greatly contributed to the length and complexity of the trial.

Hochtief contended that under the NEC forms of contract all damage to the works after Take Over is presumed to be an employer’s risk until determined otherwise. Unfortunately SSE did not administer the contract to reflect this and appeared to have misunderstood as to what the contract required.

Comment

The issue of whether a contract provides for the exercise of reasonable skill and care in design or ensuring fitness for purpose has been regularly considered by the courts and, at present, the Hojgaard case on this point is pending before the Supreme Court. The issue in SSE v Hochtief was not dissimilar to Hojgaard. There were certain contractual provisions which might indicate that a fitness for purpose obligation was applicable but, looking at the contract as a whole, and the “overwhelming weight” of the contractual provisions, the court concluded that they called for the exercise of engineering judgement.

Contact us if you require a review of your contract(s) to mitigate the risk of a fitness for purpose obligation arising inadvertently.